10-Q 1 l9227501e10-q.txt UNITED REFINING COMPANY FORM 10-Q FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Period Ended November 30, 2001 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ----------------------- ---------------------- Commission File No. 333-35083 --------- UNITED REFINING COMPANY -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Pennsylvania 25-1411751 ------------------------------------ --------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 15 Bradley Street ----------------- Warren, Pennsylvania 16365 -------------------- ----- (address of principal (Zip Code) executive office) Registrant's telephone number, including area code 814-726-4674 ------------ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ---------- ---------- Number of shares outstanding of Registrant's Common Stock as of January 17, 2002: 100.
------------------------------------------------------------------------------------------------------------------------------ TABLE OF ADDITIONAL REGISTRANTS ------------------------------------------------------------------------------------------------------------------------------ State of Other Primary Standard IRS Employer Jurisdiction of Industrial Identification Commission File Name Incorporation Classification Number Number Number ------------------------------------------------------------------------------------------------------------------------------ Kiantone Pipeline Corporation New York 4612 25-1211902 333-35083-01 ------------------------------------------------------------------------------------------------------------------------------ Kiantone Pipeline Company Pennsylvania 4600 25-1416278 333-35083-03 ------------------------------------------------------------------------------------------------------------------------------ United Refining Company of Pennsylvania 5541 25-0850960 333-35083-02 Pennsylvania ------------------------------------------------------------------------------------------------------------------------------ United Jet Center, Inc. Delaware 4500 52-1623169 333-35083-06 ------------------------------------------------------------------------------------------------------------------------------ Kwik Fill Corporation Pennsylvania 5541 25-1525543 333-35083-05 ------------------------------------------------------------------------------------------------------------------------------ Independent Gas and Oil Company of New York 5170 06-1217388 333-35083-11 Rochester, Inc. ------------------------------------------------------------------------------------------------------------------------------ Bell Oil Corp. Michigan 5541 38-1884781 333-35083-07 ------------------------------------------------------------------------------------------------------------------------------ PPC, Inc. Ohio 5541 31-0821706 333-35083-08 ------------------------------------------------------------------------------------------------------------------------------ Super Test Petroleum, Inc. Michigan 5541 38-1901439 333-35083-09 ------------------------------------------------------------------------------------------------------------------------------ Kwik-Fil, Inc. New York 5541 25-1525615 333-35083-04 ------------------------------------------------------------------------------------------------------------------------------ Vulcan Asphalt Refining Corporation Delaware 2911 23-2486891 333-35083-10 ------------------------------------------------------------------------------------------------------------------------------
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PART I. FINANCIAL INFORMATION PAGE(S) -------------------------------- Item 1. Financial Statements Consolidated Balance Sheets - November 30, 2001 and August 31, 2001 4 Consolidated Statements of Operations - Quarters Ended November 30, 2001 and 2000 5 Consolidated Statements of Cash Flows - Quarters Ended November 30, 2001 and 2000 6 Notes to Consolidated Financial Statements 7-12 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 13-16 PART II. OTHER INFORMATION 17 -----------------------------
3 UNITED REFINING COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS --------------------------- (IN THOUSANDS)
------------------------------------------------------------------------------------------------------------------------------ NOVEMBER 30, 2001 AUGUST 31, (UNAUDITED) 2001 ---------------------------------------------------------------------------------------------------------------------- ASSETS CURRENT: Cash and cash equivalents $ 27,279 $ 35,224 Accounts receivable, net 30,432 41,937 Inventories 66,938 62,554 Prepaid expenses and other assets 15,384 13,312 ---------------------------------------------------------------------------------------------------------------------- TOTAL CURRENT ASSETS 140,033 153,027 PROPERTY, PLANT AND EQUIPMENT, NET 190,121 190,951 INVESTMENT IN AFFILIATED COMPANY 1,884 1,529 DEFERRED FINANCING COSTS 3,892 4,102 OTHER ASSETS 6,590 5,948 ---------------------------------------------------------------------------------------------------------------------- $ 342,520 $ 355,557 ---------------------------------------------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDER'S EQUITY CURRENT: Current installments of long-term debt $ 112 $ 121 Accounts payable 24,613 22,206 Income taxes payable - 2,373 Accrued liabilities 18,389 12,411 Sales, use and fuel taxes payable 14,585 16,686 Deferred income taxes 4,157 4,157 Amounts due affiliated companies 1,445 1,905 ---------------------------------------------------------------------------------------------------------------------- TOTAL CURRENT LIABILITIES 63,301 59,859 LONG TERM DEBT: LESS CURRENT INSTALLMENTS 180,956 180,979 DEFERRED INCOME TAXES 14,153 17,573 DEFERRED GAIN ON SETTLEMENT OF PENSION PLAN OBLIGATIONS 1,506 1,560 DEFERRED RETIREMENT BENEFITS 19,118 19,356 OTHER NONCURRENT LIABILITIES 140 264 ---------------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES 279,174 279,591 ---------------------------------------------------------------------------------------------------------------------- COMMITMENTS AND CONTINGENCIES STOCKHOLDER'S EQUITY: Common stock, $.10 par value per share - shares authorized 100; issued and outstanding 100 - - Additional paid-in capital 16,648 16,648 Retained earnings 46,698 59,318 ---------------------------------------------------------------------------------------------------------------------- TOTAL STOCKHOLDER'S EQUITY 63,346 75,966 ---------------------------------------------------------------------------------------------------------------------- $ 342,520 $ 355,557 ----------------------------------------------------------------------------------------------------------------------
4 UNITED REFINING COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS - (UNAUDITED) ------------------------------------- (IN THOUSANDS)
------------------------------------------------------------------------------------------------------------------ THREE MONTHS ENDED NOVEMBER 30, ------------------------------------ 2001 2000 ---------------------------------------------------------------------------------------------------------- NET SALES $ 228,504 $ 296,183 COSTS OF GOODS SOLD 223,384 265,536 ---------------------------------------------------------------------------------------------------------- GROSS PROFIT 5,120 30,647 ---------------------------------------------------------------------------------------------------------- EXPENSES: Selling, general and administrative expenses 18,389 18,895 Depreciation and amortization expenses 2,960 2,732 ---------------------------------------------------------------------------------------------------------- TOTAL OPERATING EXPENSES 21,349 21,627 ---------------------------------------------------------------------------------------------------------- OPERATING INCOME (LOSS) (16,229) 9,020 ---------------------------------------------------------------------------------------------------------- OTHER INCOME (EXPENSE): Interest income 240 531 Interest expense (4,879) (5,440) Other, net (477) (347) Costs associated with acquisition - (1,300) Equity in net earnings of affiliate 355 - ---------------------------------------------------------------------------------------------------------- (4,761) (6,556) ---------------------------------------------------------------------------------------------------------- INCOME (LOSS) BEFORE INCOME TAX EXPENSE (BENEFIT) (20,990) 2,464 INCOME TAX EXPENSE (BENEFIT) (8,370) 1,035 ---------------------------------------------------------------------------------------------------------- NET INCOME (LOSS) $ (12,620) $ 1,429 ----------------------------------------------------------------------------------------------------------
5 UNITED REFINING COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS - (UNAUDITED) ------------------------------------- (IN THOUSANDS)
------------------------------------------------------------------------------------------------------------------------ THREE MONTHS ENDED NOVEMBER 30, ------------------------------------- 2001 2000 --------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ (12,620) $ 1,429 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 3,791 3,731 Post-retirement benefits (238) 847 Change in deferred income taxes (3,420) 627 Loss on asset dispositions 182 - Cash provided by (used in) working capital items 8,500 (557) Equity in net earnings of affiliate (355) - Other, net (1,441) (2,216) --------------------------------------------------------------------------------------------------------------- TOTAL ADJUSTMENTS 7,019 2,432 --------------------------------------------------------------------------------------------------------------- NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (5,601) 3,861 --------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of investment securities - (2,008) Additions to property, plant and equipment (2,312) (2,674) Proceeds from asset dispositions - 23,531 --------------------------------------------------------------------------------------------------------------- NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (2,312) 18,849 --------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Principal reductions of long-term debt (32) (32) --------------------------------------------------------------------------------------------------------------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (32) (32) --------------------------------------------------------------------------------------------------------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (7,945) 22,678 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 35,224 7,430 --------------------------------------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 27,279 $ 30,108 --------------------------------------------------------------------------------------------------------------- CASH PROVIDED BY (USED IN) WORKING CAPITAL ITEMS: Accounts receivable, net $ 11,505 $ 3,862 Inventories (4,384) (29,425) Prepaid expenses and other assets (2,072) (2,167) Accounts payable 2,407 22,476 Accrued liabilities 2,174 5,809 Amounts due affiliated companies (460) - Income taxes payable (2,373) 342 Sales, use and fuel taxes payable 1,703 (1,454) --------------------------------------------------------------------------------------------------------------- TOTAL CHANGE $ 8,500 $ (557) ---------------------------------------------------------------------------------------------------------------
6 UNITED REFINING COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) ================================================================================ 1. BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of only normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three-month period ended November 30, 2001 are not necessarily indicative of the results that may be expected for the year ending August 31, 2002. For further information, refer to the consolidated financial statements and footnotes thereto incorporated by reference in the Company's Form 10-K filing dated November 29, 2001. 2. RECENT ACCOUNTING STANDARDS In June 2001, the Financial Accounting Standards Board ("FASB") finalized Statements No. 141, "Business Combinations," ("Statement 141") and No. 142, "Goodwill and Other Intangible Assets" ("Statement 142"). Statement 141 requires the use of the purchase method of accounting and prohibits the use of the pooling-of-interests method of accounting for business combinations initiated after June 30, 2001. Statement 141 also requires that the Company recognize acquired intangible assets apart from goodwill if the acquired intangible assets meet certain criteria. Statement 141 applies to all business combinations initiated after June 30, 2001 and for purchase business combinations completed on or after July 1, 2001. It also requires, upon adoption of Statement 142 that the Company reclassify the carrying amounts of intangible assets and goodwill based on the criteria in Statement 141. Statement 142 requires, among other things, that companies no longer amortize goodwill, but instead test goodwill for impairment at least annually. In addition, Statement 142 requires that the Company identify reporting units for the purposes of assessing potential future impairments of goodwill, reassess the useful lives of other existing recognized intangible assets, and cease amortization of intangible assets with an indefinite useful life. An intangible asset with an indefinite useful life should be tested for impairment in accordance with the guidance in Statement 142. Statement 142 is required to be applied in fiscal years beginning after December 15, 2001 to all goodwill and other intangible assets recognized at that date, regardless of when those assets were initially recognized. Statement 142 requires the Company to complete a transitional goodwill impairment test six months from the date of adoption. The Company is also required to reassess the useful lives of other intangible assets within the first interim quarter after adoption of Statement 142. 7 UNITED REFINING COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) ================================================================================ The Company anticipates that the adoption of Statements 141 and 142 will not have a material effect on the Company's financial position or results of operations. In October 2001, the FASB issued Statement No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("Statement 144"). Statement 144 supersedes Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" ("Statement 121") and retains the basic requirements of Statement 121 regarding when and how to measure an impairment loss. Statement 144 provides additional implementation guidance on accounting for an impairment loss. Statement 144 is effective for all fiscal years beginning after December 15, 2001. The Company anticipates that the adoption of Statement 144 will not have a material effect on the Company's financial position or results of operations. 3. RECLASSIFICATION Certain amounts in the prior year's consolidated financial statements have been reclassified to conform with the presentation in the current year. 4. INVENTORIES Inventories consist of the following:
NOVEMBER 30, 2001 (UNAUDITED) AUGUST 31, 2001 -------------------------------------------------------------------------------------------------- Crude Oil $ 16,672 $ 15,236 Petroleum Products 26,593 24,412 ----------------------------------------------- Total @ LIFO 43,265 39,648 ----------------------------------------------- Merchandise 10,659 10,099 Supplies 13,014 12,807 ----------------------------------------------- Total @ FIFO 23,673 22,906 ----------------------------------------------- Total Inventory $ 66,938 $ 62,554 --------------------------------------------------------------------------------------------------
5. SUBSIDIARY GUARANTORS Certain of United Refining Company's (the "issuer") subsidiaries function as guarantors under the terms of the $200,000,000 Senior Unsecured Note Indenture due June 9, 2007. Financial information for the Company's wholly owned subsidiary guarantors is as follows: 8 UNITED REFINING COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) ================================================================================ Condensed Consolidating Balance Sheets (in thousands)
November 30, 2001 August 31, 2001 ---------------------------------------------- -------------------------------------------- Issuer Guarantors Eliminations Consolidated Issuer Guarantors Eliminations Consolidated ---------------------------------------------- -------------------------------------------- Assets Current: Cash and cash equivalents $ 21,106 $ 6,173 $ - $ 27,279 $ 29,197 $ 6,027 $ - $ 35,224 Accounts receivable, net 22,747 7,685 - 30,432 32,669 9,268 - 41,937 Inventories 52,104 14,834 - 66,938 47,177 15,377 - 62,554 Prepaid expenses and other assets 13,211 2,173 - 15,384 11,154 2,158 - 13,312 Intercompany 78,320 17,176 (95,496) - 81,308 18,345 (99,653) - -------------------------------------------- -------------------------------------------- Total current assets 187,488 48,041 (95,496) 140,033 201,505 51,175 (99,653) 153,027 Property, plant and equipment, net 120,154 69,967 - 190,121 121,074 69,877 - 190,951 Investment in affiliated company 1,884 - - 1,884 1,529 - - 1,529 Deferred financing costs, net 3,892 - - 3,892 4,102 - - 4,102 Other assets 7,078 683 (1,171) 6,590 6,665 454 (1,171) 5,948 -------------------------------------------- -------------------------------------------- $ 320,496 $ 118,691 $ (96,667) $ 342,520 $ 334,875 $ 121,506 $(100,824) $ 355,557 ============================================ ============================================ Liabilities and Stockholder's Equity Current: Current installments of long-term debt $ - $ 112 $ - $ 112 $ - $ 121 $ - $ 121 Accounts payable 18,716 5,897 - 24,613 16,857 5,349 - 22,206 Income taxes payable - - - - 2,413 (40) - 2,373 Accrued liabilities 15,368 3,021 - 18,389 9,739 2,672 - 12,411 Sales, use and fuel taxes payable 14,610 (25) - 14,585 16,542 144 - 16,686 Deferred income taxes 4,507 (350) - 4,157 4,507 (350) - 4,157 Amounts due affiliated companies 873 572 - 1,445 1,495 410 - 1,905 Intercompany - 95,496 (95,496) - - 99,653 (99,653) - -------------------------------------------- ------------------------------------------- Total current liabilities 54,074 104,723 (95,496) 63,301 51,553 107,959 (99,653) 59,859 Long term debt: less current installments 180,135 821 - 180,956 180,135 844 - 180,979 Deferred income taxes 7,469 6,684 - 14,153 11,009 6,564 - 17,573 Deferred gain on settlement of pension plan obligations 1,506 - - 1,506 1,560 - - 1,560 Deferred retirement benefits 18,359 759 - 19,118 18,610 746 - 19,356 Other noncurrent liabilities - 140 - 140 - 264 - 264 -------------------------------------------- -------------------------------------------- Total liabilities 261,543 113,127 (95,496) 279,174 262,867 116,377 (99,653) 279,591 -------------------------------------------- -------------------------------------------- Commitment and contingencies Stockholder's equity Common stock, $.10 par value per share - shares authorized 100; issued and outstanding, 100 - 18 (18) - - 18 (18) - Additional paid-in capital 7,150 10,651 (1,153) 16,648 7,150 10,651 (1,153) 16,648 Retained earnings 51,803 (5,105) - 46,698 64,858 (5,540) - 59,318 -------------------------------------------- -------------------------------------------- Total stockholder's equity 58,953 5,564 (1,171) 63,346 72,008 5,129 (1,171) 75,966 -------------------------------------------- -------------------------------------------- $ 320,496 $ 118,691 $ (96,667) $ 342,520 $ 334,875 $ 121,506 $(100,824) $ 355,557 ============================================ ============================================
9 UNITED REFINING COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) ================================================================================ Condensed Consolidating Statements of Operations (in thousands)
Three Months Ended November 30, 2001 Three Months Ended November 30, 2000 ------------------------------------------------- ------------------------------------------- Issuer Guarantors Eliminations Consolidated Issuer Guarantors Elimination Consolidated ------------------------------------------------- ------------------------------------------- Net sales $ 158,156 $ 115,145 $ (44,797) $228,504 $226,524 $ 141,030 $ (71,371) $ 296,183 Costs of goods sold 169,691 98,490 (44,797) 223,384 210,646 126,261 (71,371) 265,536 -------------------------------------------------------------------------------------------- Gross profit (11,535) 16,655 -- 5,120 15,878 14,769 -- 30,647 -------------------------------------------------------------------------------------------- Expenses: Selling, general and administrative expenses 4,330 14,059 -- 18,389 4,516 14,379 -- 18,895 Depreciation and amortization expenses 2,060 900 -- 2,960 1,921 811 -- 2,732 -------------------------------------------------------------------------------------------- Total operating expenses 6,390 14,959 -- 21,349 6,437 15,190 -- 21,627 -------------------------------------------------------------------------------------------- Operating income (loss) (17,925) 1,696 -- (16,229) 9,441 (421) -- 9,020 -------------------------------------------------------------------------------------------- Other income (expense): Interest income 1,518 282 (1,560) 240 2,942 457 (2,868) 531 Interest expense (5,124) (1,315) 1,560 (4,879) (5,852) (2,456) 2,868 (5,440) Other, net (524) 47 -- (477) (381) 34 -- (347) Costs associated with acquisition -- -- -- -- (1,300) -- -- (1,300) Equity in net earnings of affiliate 355 -- -- 355 -- -- -- -- -------------------------------------------------------------------------------------------- (3,775) (986) -- (4,761) (4,591) (1,965) -- (6,556) -------------------------------------------------------------------------------------------- Income (loss) before income tax (21,700) 710 -- (20,990) 4,850 (2,386) -- 2,464 expense (benefit) Income tax expense (benefit) (8,645) 275 -- (8,370) 1,979 (944) -- 1,035 -------------------------------------------------------------------------------------------- Net income (loss) $ (13,055) $ 435 $ -- $(12,620) $ 2,871 $ (1,442) $ -- 1,429 ============================================================================================
10 UNITED REFINING COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) ================================================================================ Condensed Consolidating Statements of Cash Flows (in thousands)
Three Months Ended November 30, 2001 -------------------------------------------------------- Issuer Guarantors Eliminations Consolidated -------------------------------------------------------- Net cash provided by (used in) operating activities $ (6,951) $ 1,350 $ - $ (5,601) -------------------------------------------------------- Cash flows from investing activities: Additions to property, plant and equipment (1,140) (1,172) - (2,312) -------------------------------------------------------- Net cash provided by (used in) investing activities (1,140) (1,172) - (2,312) -------------------------------------------------------- Cash flows from financing activities: Principal reductions of long-term debt - (32) - (32) -------------------------------------------------------- Net cash used in financing activities - (32) - (32) -------------------------------------------------------- Net increase (decrease) in cash and cash equivalents (8,091) 146 - (7,945) Cash and cash equivalents, beginning of period 29,197 6,027 - 35,224 -------------------------------------------------------- Cash and cash equivalents, end of period $ 21,106 $ 6,173 $ - $ 27,279 ======================================================== Three Months Ended November 30, 2000 ----------------------------------------------------- Issuer Guarantors Eliminations Consolidated ----------------------------------------------------- Net cash provided by (used in) operating activities $ 25,301 $ (21,440) $ - $ 3,861 ----------------------------------------------------- Cash flows from investing activities: Purchase of investment securities (2,008) - - (2,008) Additions to property, plant and equipment (1,733) (941) - (2,674) Proceeds from asset dispositions - 23,531 - 23,531 ----------------------------------------------------- Net cash provided by (used in) investing activities (3,741) 22,590 - 18,849 ----------------------------------------------------- Cash flows from financing activities: Principal reductions of long-term debt - (32) - (32) ----------------------------------------------------- Net cash used in financing activities - (32) - (32) ----------------------------------------------------- Net increase (decrease) in cash and cash equivalents 21,560 1,118 - 22,678 Cash and cash equivalents, beginning of period 4,107 3,323 - 7,430 ----------------------------------------------------- Cash and cash equivalents, end of period $ 25,667 $ 4,441 $ - $30,108 =====================================================
11 UNITED REFINING COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) ================================================================================ 6. SEGMENTS OF BUSINESS The Company is a petroleum refiner and marketer in its primary market area of Western New York and Northwestern Pennsylvania. Operations are organized into two business segments: wholesale and retail. The wholesale segment is responsible for the acquisition of crude oil, petroleum refining, and the marketing of petroleum products to wholesale and industrial customers. The retail segment sells petroleum products and convenience and grocery items through company owned gasoline stations and convenience stores under the Kwik Fill(R) and Red Apple Food Mart(R) brand names. Intersegment revenues are calculated using estimated market prices and are eliminated upon consolidation. Summarized financial information regarding the Company's reportable segments is presented in the following tables (in thousands): THREE MONTHS ENDED NOVEMBER 30, (UNAUDITED) -------------------------------- 2001 2000 ------------------------------------------------------------------------- Net Sales Retail $ 114,037 $ 139,860 Wholesale 114,467 156,323 ------------------------------ $ 228,504 $ 296,183 ------------------------------ Intersegment Sales Wholesale $ 43,689 $ 70,201 ------------------------------ Operating Income (Loss) Retail $ 1,916 $ (879) Wholesale (18,145) 9,899 ------------------------------ $ (16,229) $ 9,020 ------------------------------ Depreciation and Amortization Retail $ 850 $ 765 Wholesale 2,110 1,967 ------------------------------ $ 2,960 $ 2,732 ------------------------------ NOVEMBER 30, 2001 (UNAUDITED) AUGUST 31, 2001 ------------------------------------------------------------------------- Total Assets Retail $ 96,004 $ 103,161 Wholesale 246,516 252,396 ------------------------------ $ 342,520 $ 355,557 ------------------------------ Capital Expenditures Retail $ 1,172 $ 3,704 Wholesale 1,140 6,348 ------------------------------ $ 2,312 $ 10,052 ------------------------------ 7. SUBSEQUENT EVENT On December 21, 2001, the Company acquired all of the outstanding shares of stock of Country Fair, Inc. (CFI). CFI operates 69 convenience stores throughout northwestern Pennsylvania, southwestern New York and eastern Ohio. 12 UNITED REFINING COMPANY AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (UNAUDITED) ================================================================================ Recent Developments Recent Developments Worldwide crude oil prices, as indicated by prices of crude oil contracts on the New York Mercantile Exchange (NYMEX), which had peaked early in fiscal 2001 declined steadily and continued into the first quarter of fiscal 2002. NYMEX Crude oil contracts for delivery in November 2001 traded at about $5 per barrel lower than ending August contracts. In early January 2002, NYMEX crude oil contracts were trading almost $3 per barrel below the November 2001 NYMEX close. The falling worldwide prices in the first fiscal quarter resulted in a reduction in the Company's wholesale margins. The Company experienced an increase in retail diesel margins and retail gasoline margins declined from the fourth quarter of fiscal 2001; however, retail gasoline margins were higher than the first quarter fiscal 2001. Most analysts expect a further softening of crude oil prices in the early part of 2002 in response to sluggish global economic performance and weakened oil product demand (especially given the high US inventories) and questionable confidence in Opec's ability to influence global crude production followed by a global economic recovery in the second half of 2002 to arrest the price slide. The decline in NYMEX contract prices caused decreases in the pricing of the Company's working inventories, which had a negative effect on reported earnings. Also, because the Company's monthly crude oil pricing is typically determined approximately 30 days in advance of the pricing of products produced from crude, the steady price decline had the effect of reducing refinery gross margins, as products were produced from more expensive crude oil purchased the previous month. Recovery in selling prices expected later this year would be expected to result in pricing gains on the Company's working inventories. Results of Operations Comparison of Fiscal Quarters ended November 30, 2001 and November 30, 2000 Net Sales. Net sales decreased $67.7 million or 22.9% from $296.2 million for the fiscal quarter ended November 30, 2000 to $228.5 million for the fiscal quarter ended November 30, 2001. Retail sales decreased $25.9 million, or 18.5% from $139.9 million to $114.0 million, while wholesale sales decreased $41.8 million or 26.8% from $156.3 million to $114.5 million. On September 29, 2000, the Company sold 42 retail locations to a non-subsidiary affiliate and terminated the leases on 8 additional retail locations, which it had previously leased from a non-subsidiary affiliate. The retail petroleum sales volume was reduced and the wholesale petroleum sales volume correspondingly increased by the transfer of these 50 retail locations as the Company now supplies these affiliate locations on a wholesale basis. On a same-store basis, excluding prior period retail sales by these 50 locations, the retail sales decrease was due to a 17.0% decrease in retail petroleum prices offset by a slight increase in retail petroleum sales volume of .3% and increased merchandise sales of 4.6%. The wholesale sales decrease was due to a 31.1% decrease in wholesale prices, which more than offset a 2.8% increase in wholesale volume. The increase in wholesale volume was due primarily to 15.4% higher gasoline sales although distillate sales were 17.2% lower and to 13.2% higher asphalt sales despite 8.4% lower asphalt production. Although crude oil processing rates were 5.1% lower and certain refinery gasoline-producing units were shutdown for planned maintenance activities during the quarter ended November 30, 2001, gasoline and distillate production were 4.2% higher due to reductions in intermediate refinery inventories which provided feed to other gasoline and distillate producing units. 13 UNITED REFINING COMPANY AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (UNAUDITED) ================================================================================ These maintenance activities reduced gasoline and distillate production to a lesser extent than did similar activities during the prior year quarter. Higher asphalt sales were primarily due to more favorable weather for paving activities than was the case in the prior period. The more favorable weather caused more asphalt to be sold and provided more inventory capacity to store asphalt for the following spring paving season. The decrease in retail and wholesale petroleum prices was primarily due to a 23.2% decrease in worldwide crude oil prices as indicated by prices of NYMEX crude oil contracts for the fiscal quarter ended November 30, 2001 as compared to contracts for the prior year quarter. Costs of Goods Sold. Costs of goods sold decreased $42.1 million or 15.9% from $265.5 million for the fiscal quarter ended November 30, 2000 to $223.4 million for the fiscal quarter ended November 30, 2001. Retail costs of goods sold decreased $28.4 million or 22.6% from $125.7 million to $97.3 million, while wholesale costs of goods sold decreased $13.7 million or 9.9% from $139.8 million to $126.1 million. The decrease in consolidated costs of goods sold was primarily the result of the decrease in worldwide crude oil prices, partially offset by slightly lower discounts for heavy sour grades of crude oil. Costs of goods sold for the quarter ended November 30, 2001 was negatively impacted by an approximate $9.4 million decrease in the value of the Company's working inventories, which caused an increase in the costs of goods sold. Gross Profit. Gross Profit decreased $25.5 million from $30.6 million for the fiscal quarter ended November 30, 2000 to $5.1 million for the fiscal quarter ended November 30, 2001. This decrease was primarily due to lower industry wholesale margins and slightly lower discounts on heavy high-sulfur crude oil grades processed by the Company, partially offset by lower retail petroleum margins, as industry retail prices did not keep pace with rapidly falling wholesale prices. The increase was also partially offset by the negative impact on cost of goods of changes in working inventory prices, versus a beneficial impact in the prior year quarter. Operating Expenses. Operating expenses decreased $0.3 million or 1.3% from $21.6 million for the fiscal quarter ended November 30, 2000 to $21.3 million for the fiscal quarter ended November 30, 2001. Lower utilities and costs associated with credit card transactions were offset by higher payroll costs due to normal wage increases and higher professional services. Operating Income. As a result of the above, operating income decreased $25.2 million from $9.0 million for the fiscal quarter ended November 30, 2000 to ($16.2) million for the fiscal quarter ended November 30, 2001. Interest Expense. Net interest expense (interest expense less interest income) decreased $0.3 million from $4.9 million for the fiscal quarter ended November 30, 2000 to $4.6 million for the fiscal quarter ended November 30, 2001. The decreased net interest expense was due to lower balances on the Company's revolving credit facility. Income Taxes. The Company's effective tax rate for the fiscal quarter ended November 30, 2001 was approximately 39.9% compared to a rate of 42.0% for the fiscal quarter ended November 30, 2000. Liquidity and Capital Resources Working capital (current assets minus current liabilities) at November 30, 2001 was $76.7 million and at August 31, 2001 was $93.2 million. The Company's current ratio (current assets divided by current liabilities) was 2.2:1 at November 30, 2001 and 2.6:1 at August 31, 2001. 14 UNITED REFINING COMPANY AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (UNAUDITED) ================================================================================ Net cash used in operating activities totaled $4.3 million for the three months ended November 30, 2001 and net cash provided by operating activities totaled $3.9 million for the three months ended November 30, 2000. Net cash used in investing activities for purchases of property, plant and equipment totaled $2.3 million and $2.7 million for the three months ended November 30, 2001 and 2000 respectively. Net cash provided by investing activities was $23.5 million from the sale of assets for the three months ended November 30, 2000. Also, net cash used in investing activities for the purchase of stock of potential acquisition candidate totaled $2.0 million for the three months ended November 30, 2000. The Company reviews its capital expenditures on an ongoing basis. The Company currently has budgeted approximately $6.0 million for capital expenditures in fiscal 2002. Maintenance and non-discretionary capital expenditures have averaged approximately $4 million annually over the last three years for the refining and marketing operations. Management does not foresee any increase in maintenance and non-discretionary capital expenditures during fiscal 2002. Future liquidity, both short and long-term, will continue to be primarily dependent on realizing a refinery margin sufficient to cover fixed and variable expenses, including planned capital expenditures. The Company expects to be able to meet its working capital, capital expenditure and debt service requirements out of cash flow from operations, cash on hand and borrowings under the Company's secured revolving credit facility (the "Facility") with PNC Bank, N.A. as Agent Bank. The Facility commitment is currently $50,000,000, and expires on June 9, 2002. The Facility is secured by certain qualifying cash accounts, accounts receivable, and inventory. The interest rate on borrowings varies with the Company's earnings and is based on the higher of the bank's prime rate or Federal funds rate for base rate borrowings and the LIBOR rate for Euro-Rate borrowings, which was 5.08% as of November 30, 2001. Although the Company is not aware of any pending circumstances which would change its expectation, changes in the tax laws, the imposition of and changes in federal and state clean air and clean fuel requirements and other changes in environmental laws and regulations may also increase future capital expenditure levels. Future capital expenditures are also subject to business conditions affecting the industry. The Company continues to investigate strategic acquisitions and capital improvements to its existing facilities. Federal, state and local laws and regulations relating to the environment affect nearly all the operations of the Company. As is the case with all the companies engaged in similar industries, the Company faces significant exposure from actual or potential claims and lawsuits involving environmental matters. Future expenditures related to environmental matters cannot be reasonably quantified in many circumstances due to the uncertainties as to required remediation methods and related clean-up cost estimates. The Company cannot predict what additional environmental legislation or regulations will be enacted or become effective in the future or how existing or future laws or regulations will be administered or interpreted with respect to products or activities to which they have not been previously applied. 15 UNITED REFINING COMPANY AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (UNAUDITED) ================================================================================ Seasonal Factors Seasonal factors affecting the Company's business may cause variation in the prices and margins of some of the Company's products. For example, demand for gasoline tends to be highest in spring and summer months, while demand for home heating oil and kerosene tends to be highest in winter months. As a result, the margin on gasoline prices versus crude oil costs generally tends to increase in the spring and summer, while margins on home heating oil and kerosene tend to increase in winter. Inflation The effect of inflation on the Company has not been significant during the last five fiscal years. 16 PART II - OTHER INFORMATION --------------------------- Item 1. Legal Proceedings Item 2. Changes in Securities None Item 3. Defaults upon Senior Securities None Item 4. Submission of Matters to a Vote of Security Holders None Item 5. Other Information None Item 6. Exhibits and Reports on Form 8K (a) No reports on Forms 8-K have been filed for the quarter for which this report is being filed. 17 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: January 17, 2002 UNITED REFINING COMPANY --------------------------------------------- (Registrant) /s/ Myron L. Turfitt --------------------------------------------- Myron L. Turfitt President /s/ James E. Murphy --------------------------------------------- James E. Murphy Chief Financial Officer 18 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: January 17, 2002 KIANTONE PIPELINE CORPORATION ------------------------------------------------ (Registrant) /s/ Myron L. Turfitt ------------------------------------------------ Myron L. Turfitt President /s/ James E. Murphy ------------------------------------------------ James E. Murphy Chief Financial Officer 19 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: January 17, 2002 UNITED REFINING COMPANY OF PENNSYLVANIA (Registrant) /s/ Myron L. Turfitt ---------------------------------------------- Myron L. Turfitt President /s/ James E. Murphy ---------------------------------------------- James E. Murphy Chief Financial Officer 20 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: January 17, 2002 KIANTONE PIPELINE COMPANY ------------------------------------------------- (Registrant) /s/ Myron L. Turfitt ------------------------------------------------- Myron L. Turfitt President /s/ James E. Murphy ------------------------------------------------- James E. Murphy Chief Financial Officer 21 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: January 17, 2002 UNITED JET CENTER, INC. ---------------------------------------------- (Registrant) /s/ Myron L. Turfitt ---------------------------------------------- Myron L. Turfitt President /s/ James E. Murphy ---------------------------------------------- James E. Murphy Chief Financial Officer 22 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: January 17, 2002 KWIK FILL CORPORATION ----------------------------------------------- (Registrant) /s/ Myron L. Turfitt ----------------------------------------------- Myron L. Turfitt President /s/ James E. Murphy ----------------------------------------------- James E. Murphy Chief Financial Officer 23 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: January 17, 2002 INDEPENDENT GASOLINE AND OIL COMPANY OF ROCHESTER, INC. ------------------------------------------------ (Registrant) /s/ Myron L. Turfitt ------------------------------------------------ Myron L. Turfitt President /s/ James E. Murphy ------------------------------------------------ James E. Murphy Chief Financial Officer 24 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: January 17, 2002 BELL OIL CORP. ------------------------------------------------- (Registrant) /s/ Myron L. Turfitt ------------------------------------------------- Myron L. Turfitt President /s/ James E. Murphy ------------------------------------------------- James E. Murphy Chief Financial Officer 25 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: January 17, 2002 PPC, INC. ------------------------------------------------ (Registrant) /s/ Myron L. Turfitt ------------------------------------------------ Myron L. Turfitt President /s/ James E. Murphy ------------------------------------------------ James E. Murphy Chief Financial Officer 26 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: January 17, 2002 SUPER TEST PETROLEUM, INC. ------------------------------------------------ (Registrant) /s/ Myron L. Turfitt ------------------------------------------------ Myron L. Turfitt President /s/ James E. Murphy ------------------------------------------------ James E. Murphy Chief Financial Officer 27 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: January 17, 2002 KWIK-FIL, INC. ----------------------------------------------- (Registrant) /s/ Myron L. Turfitt ----------------------------------------------- Myron L. Turfitt President /s/ James E. Murphy ----------------------------------------------- James E. Murphy Chief Financial Officer 28 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: January 17, 2002 VULCAN ASPHALT REFINING CORPORATION ------------------------------------------------ (Registrant) /s/ Myron L. Turfitt ------------------------------------------------ Myron L. Turfitt President /s/ James E. Murphy ------------------------------------------------ James E. Murphy Chief Financial Officer 29